Hedge-Fund Sluggers Strike Out

In the world of hedge funds, it is harder to hide from the financial crunch.

Since the crunch began, these elite money managers have generated strong returns by focusing on areas such as commodities, emerging-market stocks or betting against troubled banks.

But as hedge funds as a group look set to turn in their worst monthly performance since July 2002, even those investment strategies that had been doing well have run into trouble. Some previously highflying funds are sustaining declines in the double digits. Several managers are down more than 20% for the year.

Consider London-based Boyer Allan Investment Management LLP, which specializes in Asian stocks and whose flagship $1 billion Boyer Allan Pacific Fund is down 28% for the year through the end of July, after turning in a 52% gain in 2007. And at London-based
RAB Capital
PLC, two funds that focus on natural resources and energy -- the $1.4 billion Special Situations Fund and $751 million RAB Energy -- are down 32.5% and 27.4% through July 24.

Hedge funds as a whole are still outperforming the broader market this year, but they potentially performed worse in July. Preliminary data from Chicago-based Hedge Fund Research based on a basket of 60 hedge funds suggest that the industry could be down 2.8% for the month -- which would be the worst performance since July 2002. The Standard & Poor's 500-stock index was down 1% for July and is down 14% for the year.

"It was a comeuppance month" for hedge funds, says
Jay Krieger,
who runs Fundamental LP, which invests in hedge funds.

Some funds that started July ahead of peers came out of it in the red. New York-based Jana Partners LLC's flagship fund entered July up more than 4% for the year but fell 9% during the month, hurt by falling prices of energy stocks, among others. The $5 billion Jana Partners fund, Jana's biggest, is now down almost 6% for the year, after delivering an average annual return since inception in 2001 of 20%.

One fund that has seen investors rushing for the exits is the $2.3 billion Highland Crusader Fund, which had built a track record investing in troubled or restructured companies. Investors in the fund, which is down about 15% this year, had put in redemption requests for more than 20% of their money as of the end of June. On Friday, the fund's manager, Dallas-based Highland Capital Management, said it would pay investors in installments over a period of as many as nine months.

Nicholas Allan,
co-founder of Boyer Allan, said a big problem for his fund was a June jump in oil prices that hit Indian stocks. "We hadn't anticipated how strong commodity pricing would be in an economic environment we felt was so weak," he said.

RAB said its funds' holdings, which consist largely of smaller energy and natural-resources companies, have been hit as investors flee to the relative safety of larger companies. Still, RAB said, "The outlook for many of the underlying investments in our natural-resources strategies continued to develop favorably."